The awful truth

A billion-dollar lie at a major outsourcing company has sent shockwaves through corporate India. By Vandana Chatlani

Having witnessed the panic and furore that followed one of India’s most high-profile cases of fraud, one cannot help but smile at the name of the company involved. Satyam is the Sanskrit word for “truth”.

A corporate legacy of prestige and respect was in tatters the moment after Satyam’s CEO, B Ramalinga Raju, resigned his position with a confession that he had falsified the company’s balance sheets. Profits has been artificially inflated by Rs50.4 billion (US$1.02 billion) over a period of several years.

In a public letter to Satyam’s board of directors on 7 January, Raju described his financial manipulation: “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.

“It has attained unmanageable proportions as the size of company operations grew significantly,” he continued.

“The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations – thereby significantly increasing the costs.”

“Every attempt made to eliminate the gap failed,” Raju wrote. “As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. “It was like riding a tiger, not knowing how to get off without being eaten.”

Observers are not sure why Raju chose the time he did to expose his lies. Some say his actions could no longer be swept under the carpet; others believe the disclosure was an attempt to regain some personal dignity.

“What was the motive for Raju to bring this out in the open?” asks Ashish Bhakta, a partner at Kanga & Co. “It escapes me. If they had hidden it for 12 years, I’m sure they would have been able to conceal it for another four, or however much longer.” Bhakta is quick to point out, however, that there can be no “good” time for such a confession. “If you tell one lie, you have to tell five lies to conceal it, so it’s like quicksand. I don’t think anything would have saved the company. There would never have been a right time to reveal the fraud.”

Truth will out

Reports suggest that Raju’s mea culpa was prompted by the failure of Satyam to acquire two companies controlled by his family. Plans for a US$1.6 billion takeover of Maytas Infra and Maytas Properties, interpreted by some as a last ditch effort to save Satyam, fell through just seven hours after the bid had been announced on 16 December. The deal was rejected by investors. Suspicions raised by the abrupt cancellation of the transaction caused a 55% fall in Satyam’s share price in New York.